Friday, July 07, 2006

Advanced Micro Devices (NYSE:AMD) - Color on warning

Several firms are cutting their estimates and price tgts on Advanced Micro Devices (NYSE:AMD) following warning issued late last night:

* Banc of America notes that as they previewed twice during the qtr, AMD lowered its June sales forecast to $1.215b (-9% Q/Q), vs. prior est. for sales to be flat to down slightly. Although a shortfall was expected, they believe the magnitude was worse than investors had been anticipating.

Various factors lead the firm to believe that the worse may not yet be behind for AMD. Specifically, they believe that 1) a continued deterioration in AMD channel inventory, 2) difficult comps heading into Q3, which will revert back to a normal 13-week qtr, 3) margin impact from late qtr. price cuts, which will be felt almost entirely in Q3, 4) strong likelihood of share loss to Intel in 2H06, and 5) an elevated cost structure heading into '07, will result in further downward adjustments to AMD's consensus forecast.

* Citigroup says notebook sales for AMD were down sequentially for AMD, reflecting finished goods inventories (likely at Acer). Firm points out that notebook ODM's have posted stronger results in June (over April and May), and outlooks for July are improving.

Clearly on a negative pre-announcement, AMD shares will face pressure in coming days. Based on its ROE potential 2006-2008, they find value in AMD's shares at a 2.0x multiple of book or ~$20. This is below firm's value target of $24, and represents mid-teen's return potential for value-oriented investors. All else equal, they would look to become more constructive should AMD's shares fall to those levels, based on current earnings forecasts.

Tgt goes to $26.50 from $33. Maintains Hold.

* Prudential is lowering their GAAP EPS forecast for the JunQ to $0.14 from $0.28, for 2006 to $1.36 from $1.73, and for 2007 to $1.73 from $2.24.

Firm notes their Overweight rating on AMD's stock is based on belief that the PC MPU market is transitioning from an industry that is dominated by one supplier (Intel) with 85%-90% share, to one that looks like a true duopoly, whose natural equilibrium is a 70/30 to 50/50 market share split. Believes the market will reach that level in 3 to 4 years, and that AMD will have $3 to $5 of EPS power.

Near term, they think that concerns over the PC market and a prolonged price war could weigh on the stock. Longer term, they believe that share gains, the potential for Dell as a large customer, and the introduction of a true quad-core MPU will drive the stock.Tgt is lowered to $40 from $45.

* Merrill Lynch notes AMD's lowered revenue and earnings outlook reflects poor demand as much as anything. Aggregate processor revenue for Intel and AMD now looks set to decline by 14% sequentially while units decline by 10% - that's a lot worse than seasonally normal. Even on AMD's new numbers it still looks to us like the company took market share in the second quarter.

According to the firm, it looks like Intel's attempts to freeze demand by talking up Q3 price cuts are at least partially responsible for the poor Q2 environment. Theyexpect build activity to pick up in Q3 regardless of whether the demand materializes later in the year or not. That's now consensus, but they think it makes sense, and they do think AMD's processor shipments will pick up meaningfully in Q3 as a result.

The next big competitive inflection point for AMD is mid 2007, when AMD launches its first real mobile processor architecture. Until then it looks like quite a fight between the two processor companies, with rapidly expanding manufacturing capacity at AMD to boot.

Much of what's happened has been possible to anticipate given the product strategies at both companies, and the firm thinks that's why AMD has already declined from $40 to $24. Maintains Neutral rating.Notablecalls: AMD's warning was expected. While some analysts say the magnitude of the warning was worse than expected I must say I disagree. I think AMD is a buy around $18-$19 level. It will not get there today though, I suspect.